Banking Regulations after the Global Financial Crisis, Good Intentions and Unintended Evil

42 Pages Posted: 10 Jan 2013

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Date Written: January 9, 2013

Abstract

More stringent regulations on bank capital, liquidity and corporate structure have been passed to increase the resilience of the global banking system. In this essay, we analyze the impact of these regulations and call attention to the fact that the banks’ responses might create unintended evil: a reduced supply of bank loans, adverse incentives on bank risk monitoring, and incentives to securitize assets and move financial intermediation to shadow banking. The conclusion is that privately-based mechanisms that put most creditors at risk are the best way to increase the safety and soundness of banking markets. It is argued that interbank debt should be put at risk because banks have a comparative advantage in risk monitoring. As putting short-term interbank at risk increases the danger of sudden deposit withdrawals, a mechanism is needed to extend the maturity of short-term debt at the time of a credit-led panic.

Suggested Citation

Dermine, Jean, Banking Regulations after the Global Financial Crisis, Good Intentions and Unintended Evil (January 9, 2013). INSEAD Working Paper No. 2013/02/FIN, Available at SSRN: https://ssrn.com/abstract=2198388 or http://dx.doi.org/10.2139/ssrn.2198388

Jean Dermine (Contact Author)

INSEAD - Finance ( email )

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F-77305 Fontainebleau Cedex
France
+33 1 60 72 41 33 (Phone)

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